We won’t get back on our feet without debt writedowns

The following opinion piece was published in the Irish Examiner on 23rd May 2012

A YES vote on May 31 will guarantee Ireland access to European bailout funding. It will also reassure multinational companies that the country is not on the verge of a funding crisis. However, the stability treaty will not solve all of Ireland’s problems. It’s only the first step in addressing the EU’s difficulties. In isolation, the treaty is the equivalent of closing the stable door after the horse has bolted. It might have prevented Greece and Italy from descending into the mess that they are now in if it had been in place when the euro was launched. However, its introduction now won’t solve the crisis in Greece, Italy, Spain, Portugal, or Ireland.

This is why the Government is fully supportive of the new French president’s insistence that the treaty must be accompanied by a plan for sustainable growth. In contrast, the German chancellor notes that debt levels are already “horrendous” and is determined that any growth plan must not involve accumulating more debt. The chancellor makes a valid point. However, Irish debt levels are “horrendous” because the Irish taxpayer is being forced to pick up the entirety of the bill for bailing out the bondholders €” many of them German €” who funded bankrupt Irish banks. This is wrong and unjustifiable.

It appears the German chancellor doesn’t realise just how “horrendous” Irish debt levels are. She is too focused on national debt levels and hasn’t appreciated the levels of household and business debt and the impact this has on our economy. Last year, central bankers from around the world met to consider the impact of all types of debt €” national debt, household debt and business debt €” on an economy.

They concluded that government debt in excess of 100% of national income damages growth, household debt in excess of 85% of national income damages growth, and business debt in excess of 90% of national income damages growth.

These figures are striking because Ireland far exceeds these levels. Last year, government debt in Ireland stood at 137% of national income, household debt was 147% of national income, and business debt was 210% of national income. At 494% the combined total debt levels in the Irish economy are the highest in the world.

A significant proportion of this debt is not the responsibility of Irish citizens and should be written down.

The bondholders in Irish banks have now largely been repaid. The banks didn’t have the cash to repay them. This is where the central banks stepped in. The ECB provided emergency funding to the Irish banks and the Central Bank of Ireland created money to lend to the Irish banks so that bank bondholders could be repaid. In the case of Anglo Irish Bank, we are expected to pay €3bn every March until the emergency liquidity assistance that our Central Bank created is repaid. To put this into context, every year Europe is forcing us to pay three times more money to clean up the Anglo Irish bank mess than we provide to the Department of Jobs, Enterprise and Innovation, which is tasked with job creation. With one in seven unemployed, this is blatantly wrong and unfair.

The obviously correct and justified policy which would promote growth is to write down the debts owed by the Irish banks to the ECB and the Central Bank of Ireland. In turn, these write-downs should be passed on to Irish families and businesses carrying unpayable debt. This meets the German chancellor’s requirements that a growth plan does not involve accumulating further debt. It provides households and businesses suffocating in debt with the breathing space they need to survive and prosper. The extra spending power generated by such writedowns would provide a huge demand stimulus and kickstart the dormant domestic economy.

There has been an extraordinary reluctance and obstruction by the European authorities to debt restructuring along the lines above. Why are they resisting debt restructuring when it is so obvious that our domestic economy has been steamrolled with debt overhang? Exports have proved to be remarkably resilient but the domestic economy appears dead on its feet, beaten down by years of contraction and increasing hardship.

This is the raw reality of the economy making it an absolute urgent imperative to get this message to penetrate into the minds of officials in Frankfurt and Brussels.

Europe’s neurotically paranoid resistance to writedowns for the Irish banks makes it impossible to transform them into effective financial engines for the Irish economy. On every count, Europe is under a moral and financial obligation not to insist on imposing the losses of the private banking system onto the Irish people. Instead it needs to face up to its responsibility to agree to writedowns for the Irish banks. Ireland is owed this: Nothing more, nothing less